IMF warns of new threats to global economy due to excessive risk taking

Excessive risk taking and geopolitical hazards pose new threats to a global economy already experiencing an uneven and weaker than expected recovery, the International Monetary Fund has warned.

In an assessment prepared for finance ministers and central bank governors of the G20 countries, the Washington-based fund said problems in the US, the eurozone, China, Japan, Russia and Latin America meant growth would not meet the 3.6% pencilled in for 2014 in April.

The IMF said it expected the world economy to pick up speed during 2015 because long-term interest rates were low, central banks were supporting activity and share prices were rising. But it issued a warning that new threats could be building even before the global economy had recovered fully from its biggest downturn since the Great Depression of the 1930s.

"New downside risks associated with geopolitical tensions and increasing risk taking are arising," the IMF said. It said other risks stemmed from low inflation, a permanent slowdown in growth rates in the west, lower growth in emerging economies and the possible disruption to financial markets that might be caused when the US Federal Reserve starts to raise interest rates.

"Despite setbacks this year, global recovery is proceeding but remains unbalanced," the paper on global prospects and challenges said. "In many advanced economies legacies of the boom and subsequent crisis – including high private and public debt – still weigh on the recovery despite relaxed financial conditions."

It added that activity had picked up after a sluggish start to 2014, "but it has been uneven and weaker than expected in the April World Economic Outlook. Growth rebounded in the US but fell short of expectations in the euro area and Japan."

The fund expects the US to do best in 2015, with growth forecast to remain "solid" in the UK, Australia, Canada and other Asian advanced economies.

But, despite action by the European Central Bank to lift activity through cuts in interest rates and credit-boosting measures, the fund believes eurozone growth will rise "more gradually and unevenly".

The US and the UK are predicted to be the fastest growing of the major G7 western economies in 2014 and 2015, and the fund said policymakers in Washington and London should be preparing to remove the ultra-stimulative policies in place for more than five years.

It said the main challenge in the US was to judge the appropriate speed at which monetary policy – interest rates and the asset purchase programme known as quantitative easing – should return to normal, given the state of the economy and the impact of higher interest rates on consumers and businesses.

"Current plans to end tapering later this year and increase policy rates from the middle of next year appear appropriate, given the sizable slack," the report said.

The IMF said UK interest rates should stay at their record low of 0.5% "for now", but borrowing costs might need to be tightened quickly if costs ran ahead of productivity growth, spare capacity was absorbed faster than expected, or if the Bank of England's new macro-prudential tools did not cope with rising house prices.